The Treasury expects public service organizations to update their pay and workforce strategies over the coming months to reflect the local pay policy announced by Chancellor Gordon Brown in his last Budget Statement. In the Statement he made it clear that because the public service accounts for around a fifth of the economy, it has a pronounced effect on whether the private sector is able to operate efficiently. The remits of key public service departments and agencies are being amended to increase the amount of regional and local pay flexibility across the public service labour market. Guidance from the Treasury on how to achieve this aim notes that the degree of regional and local flexibility of public service pay is less than in the private sector. It makes it clear that there should be closer links between pay setting and local labour markets.Although national pay bargaining within the civil service, health, education and other areas will remain, ‘local positioning’ will have to be built into the national pay arrangements. There is a wide range of options below national level ranging from regional differentiation at the coarsest level to individual service provider units at the opposite end of the scale. The Guidance makes it clear that the choice of pay model will depend on the circumstances, including the stage of implementation of local pay and the quality of information available to make decisions. Because of the need for simplicity and practicability it is likely that there will be few differentiations, possibly defined by localities or by a number of localities grouped into one or more zones covering the country as a whole according to the cost of living and labour market characteristics.

Local government pay bargaining strategy will remain unchanged because councils already create their own individual grading and band structure and they can position jobs anywhere on the national scale, where they think appropriate,such as in response to recruitment pressures. The new arrangement will, however, effect local government pay because the labour market will be affected where cost of living and recruitment pressures are lower. In some locations where there are concentrations of public service staff, such as Department of Work and Pensions processing centres, the effect could be significant.

The Guidance gives examples from the public and private sectors of models which provide for local pay. The NHS has replaced the London allowance and cost of living supplements with salary supplements of 20% for inner London, 15% for outer London and 5% for fringe areas. For staff working outside London, cost of living supplements are being converted into long-term recruitment and retention premia. In the Prison Service national pay will be supplemented where there are recruitment and retention difficulties. Individual prison establishments will have to make a case for supplements based on cost of living and local labour market competition.

Boots the Chemist and Tesco are quoted as private sector examples. Boots has four pay zones ranging from central London to provincial. Tesco similarly operates a national pay structure for its retail staff across the country. It has five pay bands, the upper bands applying in areas with higher costs and or areas with recruitment and retention problems.